NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'A+' rating on the following City of Toledo
(the city), OH outstanding revenue bonds:

--$3.4 million sewer system (the system) revenue and refunding bonds,
series 2005.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by net sewer system revenues, including pledged
funds.

KEY RATING DRIVERS

WEAK FINANCIAL MARGINS: Anticipated debt service coverage (DSC) of
all-in system debt will stay very slim in the five year forecast but
remain above the city's internal coverage target of 1.05x. However, DSC
of senior lien debt has stayed strong historically, ending fiscal year
2013 with 11.1x coverage. Liquidity is strong for the rating.

REGULATORY-DRIVEN CAPITAL NEEDS: The sewer system's capital improvement
plan (CIP) is heavily dictated by projects necessary to meet the city's
consent decree requirements. The city has fully outlined and identified
a plan of funding for all required projects in its long-term capital
program and has until 2020 to fulfill all of its mandated obligations.

HIGH AND INCREASING DEBT BURDEN: Debt ratios are high relative to
comparable ratings and will rise further as projects necessary to meet
consent decree requirements are funded. Approximately 70% of the
projected debt required for the city's capital program will be
subordinate loans from the Ohio Water Development Authority and Ohio
Public Works Commission (OWDA and OPWC) and only limited senior lien
debt is expected to be issued over the next five years.

IMPROVING ECONOMY: Service area economics remain somewhat weak, however
unemployment has fallen to historic lows and local economic development
is improving after several years of depressed activity.

RATING SENSITIVITIES

STABLE FINANCIAL PERFORMANCE AMID GROWING DEBT BURDEN: The ability for
management to maintain or exceed current financial margins given
escalating annual debt service (ADS) costs will be necessary to preserve
rating stability. Deviation from stated financial projections may result
in negative rating action.

APPROVAL OF SEWER RATE INCREASES: The system's ability to secure City
Council approval of rate increases necessary to maintain current
financial performance will lend stability to the rating.

CREDIT PROFILE

ADEQUATE OPERATING PROFILE, LARGE MANDATED PROJECTS

In 2002 the city entered into a 20-year consent decree with the U.S.
Environmental Protection Agency (EPA) in order to mitigate combined and
sanitary sewer overflows. The city created the Toledo Waterways
Initiative (TWI) Program to actively manage the required $520 million of
identified mandated consent decree projects. To date, management has
expended 62% of required consent decree/TWI capital outlays. The primary
TWI projects driving the bulk of spending are currently underway and
include the construction of massive underground retention tanks. These
tanks will store excess wastewater flows during periods of heavy
precipitation until the city's wastewater treatment plant (WWTP) has
capacity to treat the flows. The city has until 2020 to fulfill its
consent decree requirements and believes it is on target to meet that
goal.

WEAK FINANCIAL PROFILE

Coverage of all-in debt, which is primarily comprised of OWDA and OPWC
subordinate lien loans, has averaged at only 1.26x from fiscal years
2008 through 2012. However, all-in coverage in fiscal year 2013 was
comparatively strong at 2.0x due to increased wastewater revenues that
year. Senior lien debt service coverage (DSC) was a very high 11.1x,
consistent with high historical coverage levels since 2008, and largely
reflecting higher leveraging on the subordinate lien. This coverage
level is expected to fall somewhat over the next five years but remain
very high, above 6.0x, as only moderate amounts of additional bonds are
issued.

Pro forma projections as of August 2013 predicted coverage for fiscal
year 2013 at closer to 1.16x, and all-in DSC within the range of 1.14x
to 1.23x through fiscal year 2018. Given the positive coverage outcome
of all-in debt in fiscal year 2013, Fitch views the pro forma estimates
of slim all-in coverage expectations to be somewhat conservative.
However, as the city plans to continue funding its consent decree
projects with additional subordinate loans, margins are likely to stay
low, limiting any marked improvement in total DSC through the fiscal
2018 forecast period.

Liquidity has varied over time; in fiscal year 2013 the system's days'
cash on hand equated to a very healthy 538 days. Though Fitch expects
cash to stay at levels more than sufficient to meet the very minimal
pay-go portion of the system's capital needs, the continued escalation
of all-in ADS costs is likely to diminish cash margins over time. By
fiscal 2017, all-in ADS is expected to consume a very high 41% of gross
operating revenues (the 'A' median average is 24%).

INCREASING DEBT AND CAPITAL BURDEN

The sewer system's six-year fiscal 2013-2018 CIP totals $302.4 million
and is about 99% debt-funded. 77% of the CIP, or roughly $234.3 million,
is projected to be funded by low-interest subordinate OWDA and OPWC
loans and will solely address the mandated projects necessary to meet
the city's consent decree. The balance of the CIP, close to $65 million,
will be almost entirely funded by bonds and will support non-consent
order projects. Capital spending per capita is high for the rating at
nearly $500, and is expected to increase six-fold over the next five
years as the city enacts the bulk of its major capital projects.

Leverage ratios are high with debt-to-net-plant at 60% in fiscal year
2013 relative to the 54% 'A' median average. This ratio is expected to
rise as the utility continues to issue upwards of $240 million more in
debt over the next five years. Debt per customer was very high in fiscal
2013 at $3,398 and is projected at $5,422 over the next five years,
exceeding the 'A' category median by over two times. Debt amortization
is currently rapid with 94% paid off in 20 years; however, additional
forecasted debt issuances will likely slow the current rapid payout pace
significantly.

LIMITED RATE SETTING FLEXIBILITY

Sewer rates consist of a fixed service fee, a volumetric usage charge,
and in more recent years, an additional fixed TWI fee that directly
funds consent decree-related projects. Consistent with a prior four-year
rate plan, the service charge and volumetric rates were both raised by
3% for fiscal year 2014. The additional TWI charge has stayed flat at
$15.82 each year since fiscal year 2011. The utility is currently
undergoing its next four-year rate plan revision process to decide sewer
rate increases for fiscal years 2015-2018. These rates will be sized to
support ongoing operations, as well as to modify the additional charge
dedicated to the TWI program. Based on the successful passage of prior
rate plans, management is optimistic that the proposed rate increases
and continued dedicated TWI funding will be approved by City Council.
Fitch expects that the proposed plan will yield revenue projections
sufficient to meet the system's growing debt service costs in line with
historical performance.

The typical residential customer spent $146.14 per quarter (or
approximately $50 per month) on their sewer bill in fiscal year 2013.
This equated to roughly 1.7% of median household income (MHI), which is
considered high by Fitch as it exceeds the 1% threshold for a single
utility bill's proportion of monthly spending. When charged along with
the city's water bill, which comprises 0.6% of MHI, combined utility
rates equate to over 2.0% of MHI. As both the water and sewer utility's
rates are on the rise to support large debt-funded capital programs,
individual rate-setting flexibility may become increasingly strained.

RECOVERING SERVICE AREA

Toledo is the county seat of Lucas County, located in northwestern Ohio.
The city's economy is driven by manufacturing, health care, education
and local government. The city's unemployment rate, measured at 6.2% in
April 2014, is at its lowest point in recent history, ranking below both
the state (7.5%) and national levels (6.3%). Wealth levels within the
county are low; per capita personal income levels in Toledo fall below
both the state and national averages.

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